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On Equivalence Results in Business Cycle Accounting

Kengo Nutahara and Masaru Inaba

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: Business cycle accounting rests on the insight that the prototype neoclassical growth model with time-varying wedges can achieve the same allocation generated by a large class of frictional models: equivalence results. Equivalence results are shown under general conditions about the process of wedges while it is often specified to be the first order vector autoregressive when one applies business cycle accounting to actual data. In this paper, we characterize the class of models covered by the prototype model under the conventional first order vector autoregressive specification of wedges and find that it is much smaller than that believed in previous literature. We also apply business cycle accounting to an artificial economy where the equivalence does not hold and provide a numerical example that business cycle accounting works well even in such an economy.

New Economics Papers: this item is included in nep-acc, nep-bec, nep-dge and nep-mac
Date: 2008-05
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